What the Pandemic Means for Healthcare Spending and Saving

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Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. While spending on healthcare declined precipitously in the first half of the year, things picked up in the third quarter. Joining me today to talk a little bit about how we should be thinking about our healthcare spending in terms of our financial plan is Christine Benz. Christine is Morningstar's director of personal finance.

Christine, thank you for being here.

Christine Benz: Susan, it's great to be here. Thank you.

Dziubinski: Now, given that the pandemic is first and foremost a health crisis, it seems a little ironic that healthcare spending declined as much as it did in the first half of the year. What do you make of that?

Benz: It really was surprising to me, Susan, when I started researching this. But when you think about it, it's perfectly logical because remember where we were in the spring and summer months. A lot of people put nonessential healthcare on hold, and in some cases, they put essential healthcare on hold, unfortunately. So, people had annual physicals scheduled or colonoscopies or knee replacements. A lot of those things simply weren't happening in the first half, either because the healthcare providers just weren't there, weren't providing those services, or in some cases, people put off receiving those services. So, that is why we did see healthcare spending come to a pretty significant decline during the first half even though COVID was raging.

Dziubinski: But things did pick up a bit in the third quarter, right?

Benz: They did. So, we saw a big jump up in terms of GDP growth overall in the third quarter, and a healthy share of that was healthcare spending, which jumped by 18%. So, a big, big comeback for healthcare spending.

Dziubinski: Now, many people wrestle with their healthcare costs and healthcare expenses. Even if we're covered by insurance through our employer, health insurance through our employer, how should we be thinking about healthcare spending within our financial plans?

Benz: Well, it's a really big topic, Susan, and I think we're at the right time of year to be talking about it because it's open enrollment season for many employers. And so, if you are confronted with choices in your healthcare coverage, I think one of the key things you can do is make sure that you're making the right choice for you. So, increasingly, large employers are offering their employees the traditional preferred provider organization, the PPO plan, or the high deductible healthcare plan. And a lot of consumers sort of reflexively say, "I want more certainty. I don't want high out-of-pocket costs." But my advice is really to run the numbers, look at your healthcare spending, what you expect it to be in 2021. What you might find is because the premiums are lower on the high deductible plans typically, and in some cases employers provide subsidies for their employees to choose the high deductible plan, when all is said and done, you may actually be better off in the high deductible plan. Now, if you don't have any choice in the matter, it is what it is, but really be thoughtful about making your choices in terms of healthcare coverage. Don't just fall back on whatever you selected last year, because it's not necessarily going to be the most financially savvy choice for you going forward.

Dziubinski: Now, most high deductible plans come with access to a health savings account, and you've talked about these before. You really like these accounts. Talk a little bit about why people should be pursuing their health savings account if they're offered one.

Benz: The tax benefits are really the key reason. Like anyone else who has looked at these plans, I've been so impressed by the fact that you receive better tax treatment on your contributions to the HSA than you would with any other vehicle, whether a 401(k) or a Roth IRA, and the key reason is that you're putting in pretax dollars, to the extent that you've got that money invested in earning any type of interest, you're not getting taxed as long as the money is inside the account, and then any withdrawals for qualified healthcare expenses also come out tax-free. So, at a minimum, if you are someone who is covered by a high deductible plan and you expect to have any healthcare expenditures at all, plan to run it through the HSA to enjoy those tax benefits.

The tax benefits really accrue though to people who can afford to use other assets to pay for their healthcare expenses. So, where they can get that money invested in the HSA, then they can really enjoy that tax advantage compounding over a longer period of time. It's not use-it-or-lose-it for HSA assets. There's oftentimes confusion about that. People think that it's like a flexible spending arrangement. It's not. You can get that money invested and leave it in the account for the long haul and enjoy the tax benefits for a longer period of time.

Dziubinski: Let's pivot and talk a little bit about healthcare costs in retirement. How should we be thinking about those even before we're retired? And then what are some ideas for managing them while in retirement?

Benz: It's a big topic, Susan. I think the key point I would make is that people should really try to get a sense of what their spending will look like on healthcare in retirement. It will be different than if you were covered by an employer plan. Obviously, you'll have Medicare, but you also will have some coverage that you'll have to buy on your own. So, selecting the right coverage there is certainly important. And Mark Miller, who is a contributor to Morningstar.com, writes a lot about managing healthcare costs in retirement. We're in Medicare open enrollment season now, and Mark writes about how to make smart choices there.

But I think it's also important as a retiree to get your arms around some of the costs that you'll be on the hook for. So, Fidelity every year comes out with an annual estimate of what a 65-year-old couple will spend over their retirement time horizon. The most recent figures came in at around $300,000, and that does not include long-term-care expenses. So, there are a lot of different variables. It's also, I think, important to bear in mind, our colleague David Blanchett's research that points to retirement spending trending up later in retirement largely because of uninsured healthcare costs. So, your healthcare spending in retirement won't be a flat line, but definitely factor it in as part of your financial plan. Get a plan for long-term care. If you're bringing HSA, health savings account, assets into retirement, all the better, but do plan to spend them during your retirement time horizon because they're generally not great assets to leave to anyone other than your spouse. So, a lot of different variables there, but it's a huge and important topic.

Dziubinski: It sure is, and it's a big spend for a lot of people. So, to your point, really important to think about it as part of your financial plan.

Benz: Absolutely.

Dziubinski: Thank you for being with us today, Christine. We appreciate it.

Benz: Thank you, Susan. Great to be here.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thank you for tuning in.